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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
X THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 1996
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
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Commission file number 33-69286
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WRIGHT MEDICAL TECHNOLOGY, INC.
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(Exact name of registrant as specified in its charter)
Delaware 62-1532765
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5677 Airline Road, Arlington, Tennessee 38002-0100
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (901)867-9971
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Number of shares outstanding of Class A Common Stock, par value $.001 at May 3,
1996: 9,011,791
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Wright Medical Technology, Inc. & Subsidiaries:
Consolidated Balance Sheets - March 31, 1996
and December 31, 1995 . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations
for the Three Month Periods Ended March 31, 1996
and March 31, 1995 . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the
Three Month Periods Ended March 31, 1996 and
March 31, 1995 . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . 6
ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . 9
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WRIGHT MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, Dec. 31,
1996 1995
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(unaudited)
(in thousands) (in thousands)
ASSETS
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Current Assets:
Cash and cash equivalents $ 1,137 $ 1,126
Trade receivables, net 18,635 18,269
Inventories, net 60,541 54,815
Prepaid expenses 1,303 1,353
Other 2,108 1,948
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Total Current Assets 83,724 77,511
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Property, Plant and Equipment, Net 36,672 39,141
Deferred Income Taxes 2,608 2,608
Other Assets 53,564 55,111
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$176,568 $174,371
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LIABILITIES AND STOCKHOLDERS' INVESTMENT
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Current Liabilities:
Current portion of long-term debt $ 370 $ 446
Short-term borrowings 10,850 3,900
Accounts payable 6,849 7,769
Accrued expenses 12,868 17,550
Deferred income taxes 2,608 2,608
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Total Current Liabilities 33,545 32,273
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Long-Term Debt 84,467 84,462
Preferred Stock Dividends 18,515 14,938
Other Liabilities 1,416 570
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Total Liabilities 137,943 132,243
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Commitments and Contingencies
Mandatorily Redeemable Series B Preferred Stock, $.01 par value,
(aggregate liquidation value $69.8 million, including
accrued and unpaid dividends of $9.8 million, 800,000 shares
authorized, 600,000 shares issued and outstanding) 47,259 46,757
Redeemable Convertible Series C Preferred Stock, $.01 par value,
(aggregate liquidation value $37.2 million, including accrued
and unpaid dividends of $2.2 million, 350,000 shares
authorized, issued and outstanding) 21,660 20,548
Stockholders' Investment:
Series A preferred stock, $.01 par value, (aggregate liquidation
value of $23.0 million, including accrued and unpaid dividends
of $6.5 million), 1,200,000 shares authorized, 915,325 shares
issued and outstanding 9 9
Undesignated preferred stock, $.01 par value, 650,000 shares
authorized, no shares issued - -
Class A common stock, $.001 par value, 46,000,000 shares
authorized, 9,876,171 and 9,791,040 shares issued and outstanding 10 10
Class B common stock, $.01 par value, 1,000,000 shares
authorized, no shares issued - -
Additional Capital 53,116 51,470
Accumulated Deficit (83,237) (76,557)
Other 847 930
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(29,255) (24,138)
Less-Notes receivable from stockholders (1,037) (1,037)
Series A preferred treasury stock, 85,338 shares (1) (1)
Class A common treasury stock, 863,880 shares (1) (1)
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Total Stockholders' Investment (30,294) (25,177)
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$176,568 $174,371
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The accompanying notes are an integral part of these balance sheets.
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WRIGHT MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except loss per share)
(unaudited)
Three Months Ended
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March 31, March 31,
1996 1995
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Net sales $30,707 $33,083
Cost of goods sold 9,577 8,429
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Gross profit 21,130 24,654
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Operating expenses:
Selling 11,456 11,316
General and administrative 4,996 6,991
Research and development 3,048 2,945
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19,500 21,252
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Operating income 1,630 3,402
Interest expense, net 2,965 2,726
Other expense, net 129 282
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Income (loss) before income taxes (1,464) 394
Provision for income taxes 25 -
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Net income (loss) $(1,489) $394
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Loss applicable to common stock $(6,681) $(2,040)
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Loss per share of common stock $ (0.75) $ (0.24)
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Weighted average common shares outstanding 8,957 8,636
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The accompanying notes are an integral part of these statements.
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WRIGHT MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended
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March 31, March 31,
1996 1995
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Cash Flows From Operating Activities:
Net income (loss) $(1,489) $ 394
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 2,496 2,138
Provision for excess/obsolete inventory (515) (1,870)
Provision for sales returns (98) 72
Amortization of intangible assets 737 1,053
Amortization of deferred financing costs 351 216
Loss on disposal/abandonment of equipment 49 -
Other 129 329
Changes in assets and liabilities,
Trade receivables (268) (4,502)
Inventories (3,017) 51
Other current assets (110) (1,153)
Accounts payable 113 492
Accrued expenses and other liabilities (4,695) (10,613)
Other assets 435 (309)
Deferred income 856 -
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Net cash used in operating activities (5,026) (13,702)
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Cash Flows From Investing Activities:
Capital expenditures (2,329) (4,256)
Other (87)
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Net cash used in investing activities (2,416) (4,256)
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Cash Flows From Financing Activities:
Payments received on notes receivable from
stockholders - 49
Proceeds from issuance of stock 631 9
Proceeds from short-term borrowing 6,950 17,500
Payments of debt (112) (310)
Other (16) (62)
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Net cash provided by financing activities 7,453 17,186
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Net increase (decrease) in cash and cash equivalents 11 (772)
Cash and cash equivalents, beginning of period 1,126 3,072
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Cash and cash equivalents, end of period $ 1,137 $ 2,300
===========================
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest $ 4,870 $ 4,685
===========================
Cash paid for income taxes $ - $ -
===========================
The accompanying notes are an integral part of these statements.
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WRIGHT MEDICAL TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements as of March 31, 1996 and for the
three month periods ended March 31, 1996 and March 31, 1995 include the
accounts of Wright Medical Technology, Inc. and its wholly-owned domestic and
foreign subsidiaries ("the Company").
The accompanying unaudited financial information, in management's
opinion, includes all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position, results of
operations and cash flows for the periods presented. The results of the
periods presented are not necessarily indicative of the results to be expected
for the full year.
The financial information has been prepared in accordance with the
instructions to Form 10-Q and, therefore, does not include all information and
footnote disclosures necessary for fair presentation of financial statements
prepared in accordance with generally accepted accounting principles. These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
1995 Annual Report on Form 10-K.
NOTE 2 - INVENTORIES
Components of inventory are as follows (in thousands):
March 31, Dec. 31,
1996 1995
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(unaudited)
Raw materials $ 2,271 $ 3,146
Work in process 9,353 10,971
Finished goods 48,917 40,698
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Total $60,541 $54,815
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NOTE 3 - ACCRUED EXPENSES
A detail of accrued expenses is as follows (in thousands):
March 31, Dec. 31,
1996 1995
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(unaudited)
Interest $ 2,391 $ 4,619
Employee benefits 1,503 2,350
Research & development 1,950 2,600
Professional fees 1,184 1,020
Commissions 1,675 1,385
Royalties 398 380
Taxes - other than income 907 1,194
Other 2,860 4,002
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Total $12,868 $17,550
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NOTE 4 - LEGAL PROCEEDINGS
Substantial patent litigation among competitors occurs regularly in
the medical device industry. The Company assumed responsibility for certain
patent litigation in which the Company and/or Dow Corning and/or its former
subsidiary, Dow Corning Wright Corporation (collectively, "DCW") was a party.
Those proceedings in which the Company was a defendant have now been resolved.
DCW, pursuant to the Acquisition agreements, retains liability for
matters arising from conduct of DCW prior to the Company's acquisition on June
30, 1993, of substantially all the assets of the large joint orthopaedic
implant business of DCW. As such, DCW has agreed to indemnify the Company
against all liability for all products manufactured prior to the Acquisition
except for products provided under the Company's 1993 agreement with DCW
pursuant to which the Company purchased certain small joint orthopaedic
implants for worldwide distribution. However, the Company was notified in May
1995 that DCW, which filed for reorganization under Chapter 11 of the U.S.
Bankruptcy Code, would no longer defend the Company in such matters until it
received further direction from the bankruptcy court. Accordingly, there can
be no assurance that Dow Corning will indemnify the Company on any claims in
the future. Although the Company does not maintain insurance for claims
arising on products sold by DCW, management does not believe the outcome of any
of these matters will have a material adverse effect on the Company's financial
position or results of operations.
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The Company is not involved in any other pending litigation of a
material nature or that would have a material adverse effect on the Company's
financial position or results of operations.
NOTE 5 - NEW ACCOUNTING PRONOUNCEMENTS
The Company has adopted Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the imparement of long-lived assets and for long-lived
assets to be disposed of." The Company has determined that the adoption of
this statement does not have a material effect on its consolidated financial
position or operating results.
In October 1995, the FASB issued SFAS No. 123, "Accounting for stock-based
compensation". The Company will continue accounting for its stock-based
compensation plan in accordance with APB Opinion No. 25. However, pursuant to
SFAS No. 123, the Company will provide pro forma net income and pro forma
earnings per share information as if the fair value based accounting method
promulgated by SFAS No. 123 had been followed. This pro forma information,
along with other disclosures regarding the assumptions used in determining fair
value, will be provided, in the financial statements included in the Company's
1996 annual report to be filed with the Securities and Exchange Commission on
Form 10K. At this time, management has not quantified the effect of applying
this statement.
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ITEM 2. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Management believes the decline in sales for the first quarter
compared to prior year has several explanations. The first quarter of 1995 was
a very strong quarter for the orthopaedic industry as a whole. In the first
quarter of 1996, the number of orthopaedic surgical procedures was adversely
affected compared to prior year as a result, in part, of the severe winter
weather in much of the United States. With respect to knee sales, the Company
has been adversely affected by an industry wide shift from more expensive,
porous coated, press fit knee implants to less expensive cemented implants as
payors and purchasers of the Company's products have become increasingly cost
conscious. The Company's flagship Advantim(R) Knee System has been
historically primarily used in press fit configurations, and the Company's
sales of press fit knee implants has been higher as a percentage of total
sales than industry averages. The Company experienced a continuing transition
from press fit to cemented knee implant sales in the first quarter of 1996
which adversely affected revenue.
In the balance of 1996, the Company will be bringing to market a
number of new products, including the Extend(TM) Hip System which will give the
Company a full product offering in the revision hip market, the Questor(TM)
Total Elbow System, the Advance(TM) Knee System, a totally new knee system
licensed from the Hospital for Special Surgery in New York City, the
Versalok(TM) Spinal System, the Company's first entry into the lower back
fixation market, and a number of new products for the trauma and arthroscopy
markets. In addition, the Company will introduce a new line of bone void
fillers and bone graft substitutes employing proprietary technologies licensed
from U. S. Gypsum Corporation.
The Company has also completed the integration of the Wright and
Orthomet distribution networks and has put in place a number of new programs to
strengthen and enlarge its domestic sales force.
Internationally, the Company entered into an exclusive distribution
agreement with Century Medical, Inc., a subsidiary of Itochu Corporation, to
become the Company's sole distributor in Japan and with a U. S. based
distribution company to become the Company's exclusive distributor in South
America.
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RESULTS OF OPERATIONS
The Company's net sales for the quarter ended March 31, 1996 were
$30.7 million as compared to prior year's sales of $33.1 million for the same
period. Contributing to this shortfall in sales of $2.4 million year over year
were knees ($2.6 million) and small joints ($0.8 million) offset by increases
in hips ($0.1 million), trauma ($0.3 million), arthroscopy ($0.3 million) and
spine ($0.2 million). The new markets in which the Company began to broaden
its product lines in 1995 (trauma, arthroscopy and spine) contributed revenue
of $0.8 million during the first quarter of 1996.
Domestic sales for the period were $23.0 million compared to 1995
sales of $25.4 million. This unfavorable variance of $2.4 million accounted
for the global sales shortfall.
International sales were flat year over year despite the fact that the
Company did not complete its negotiations for a new Japanese distributor until
late February. Management fully expects strong sales for the rest of 1996.
Japan's sales in 1996 of $1.1 million compared to $1.8 million in 1995 were the
result of those on-going negotiations. Overall, international sales were flat
for the first quarter because of higher 1996 versus 1995 sales in Latin America
($0.6 million), Europe ($0.1 million) and Canada ($0.3 million), which offset
the Japan shortfall.
SELLING
Selling expenses in total remained relatively flat for the period as
compared to prior year with first quarter 1996 expenses of $11.5 million versus
$11.3 million in 1995. Selling expense increases included commissions which
increased from $5.2 million or approximately 15.6% of global sales in 1995 to
$5.6 million or approximately 18.1% of global sales in 1996. This increase was
primarily due to sales force guarantees and incentives of $0.6 million in 1996
compared to $0.2 million in 1995.
Other selling expenses that contributed to the higher 1996 amount was
the Managed Care Division of the Company which was offset by a decrease in
spending in U.S. Sales and Marketing. This decrease in the U.S. is partially
due to the conclusion in 1995 of the Orthomet/Wright sales force consolidation.
This consolidation occurred throughout 1995 and expenses should continue to be
favorable year over year through 1996. Additionally, there was less spending
in 1996 versus 1995 for surgeon travel and trade shows.
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COST OF SALES
Cost of Sales for the period increased by $1.1 million or
approximately 13.6% over the same period in 1995. This net increase resulted
primarily from a higher level of sales of fully reserved products in 1995
(which was not expected to recur, and in fact did not recur, during the first
quarter of 1996). In 1994, reserves were established for certain products that
the Company did not expect to remain viable in 1995 due to the acquisition of
Orthomet, Inc. and the decision to cease gamma radiation of implants in favor
of ethylene oxide gas technology. However, some of these products continued to
be sold in 1995 resulting in the reversal of inventory reserves. Partially
offsetting this was a decrease in 1996 cost of sales resulting from the
decreased level of sales in 1996.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the three months ended March
31, 1996 decreased $2.0 million, or approximately 28.6% over the same period in
1995. The major contributors to the 1996 decrease in expenses were lower
management bonus accruals ($0.4 million), non-recurring 1995 expenses
associated with the transition and shutdown of Orthomet ($0.5 million),
renegotiated (reduced) insurance costs ($0.3 million), lower foreign expenses
in France, Australia, and Brazil ($0.2 million), lower intangibles amortization
expense ($0.3 million), reduced legal expenses associated with litigation and
patent applications ($0.2 million), and decreased travel expenses ($0.1
million).
RESEARCH AND DEVELOPMENT
Research and development expenses of $3.0 million for the first
quarter of 1996 increased approximately $0.1 million over the first quarter of
1995. This increase was due to hip development efforts occurring in France.
OTHER
Non-operating expenses decreased period over period due to lower
foreign currency losses in 1996 than the same period in 1995.
Interest expense increased slightly by $0.2 million for the three
months ended March 31, 1996 as compared to the same period in 1995 due to the
amortization of deferred financing expenses associated with the equity infusion
that occurred in September, 1995.
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For the three months ended March 31, 1996 earnings before interest,
taxes, depreciation, and amortization ("EBITDA") is detailed in the table
below.
March 31,
1996
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Operating Income $1,630
Depreciation and Instrument Amortization 2,496
Amortization of Intangibles 737
Amortization of Other Assets 91
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EBITDA $4,954
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LIQUIDITY AND CAPITAL RESOURCES
Since the DCW Acquisition, the Company's strategy has been to attain
growth aggressively through new product development and acquisition of new
technologies through license agreements, joint ventures and purchases of other
companies in the orthopaedic field. As anticipated, the Company's substantial
needs for working capital have been funded through the sale of $85 million of
senior debt securities and $15 million of equity at the time of the DCW
Acquisition, through the issuance of Series B Preferred Stock in 1994 to the
California Public Employees' Retirement System ($60 million), through the
issuance of Series C Preferred Stock to the Princes Gate purchasers in
September of 1995 ($35 million) (see Note 8 to the Financial Statements), and
through borrowings on the Company's revolving line of credit, that are
discussed below.
The Company has available to it a $30 million revolving line of credit
under the Heller Agreement (the "Heller Agreement") which provided an eligible
borrowing base at March 31, 1996 of $26.4 million. As of May 3,1996, the
Company had drawn $11.8 million under this agreement. The Company's continued
growth has resulted in an increase in its capital requirements and has been
dependent upon the Heller Agreement and other funding sources to meet working
capital needs. During the first quarter of 1996, borrowings under the Heller
Agreement reached $14.4 million as compared to 1995 first quarter when
borrowing reached $17.7 million.
The Heller Agreement expires in September, 1996. The Company's projected
cash flow requirements for 1996 indicate that this or a similar revolving
credit agreement will again be needed to fund working capital needs.
Management is in the process of negotiating with several financial institutions
and believes it will successfully secure a revolving credit arrangement that
will
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meet the working capital needs of the Company for the remainder of 1996. There
can be no assurance that the Company will be able to secure such financing on
favorable terms, if at all.
The Company's capitalization includes senior debt securities of $84.3
million and various series of preferred stock with an aggregate liquidation
value of $107.0 million at March 31, 1996. These securities currently bear
interest or dividend rates ranging from 10 3/4% to 12.1% and, in certain
circumstances, these rates can increase to 21.4%. As a result of the Company's
obligations to establish a sinking fund for its senior debt securities beginning
in July 1998 and its obligation to issue additional warrants to acquire common
stock in the event that the Series C Preferred Stock is not redeemed or there
has not otherwise been a qualified initial public offering on or before March
1999, the Company believes that it will be required to effect an initial public
offering of its common stock or some other form of a recapitalization plan to
satisfy these future obligations. There can be no assurance that the Company
will be able to effect such an offering or recapitalization on favorable terms,
if at all.
At March 31, 1996, the Company had less than $1.1 million in outstanding
capital commitments, and has budgeted approximately $3.4 million for 1996
expenditures for the purchase of machinery and related capital equipment.
Additionally, management expects to fund the production of new or additional
instruments, which is budgeted at $5.3 million for 1996.
As of March 31, 1996, the Company had net working capital of $50.2
million, compared with $45.2 million as of December 31, 1995. Of this $5.0
million growth, $5.7 million is attributed to growth in inventory offset by an
increase in current liabilities ($1.3 million) due to increased borrowing.
Inventories continued to grow as the Company continues to build products for
its core businesses, as well as build new products for its entry into new
markets.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See Note 4. in the "NOTES TO CONSOLIDATED FINANCIAL STATEMENTS"
On Page 7.
ITEM 2. CHANGES IN SECURITIES.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
A) See Exhibit Index at page 16.
B) No reports on Form 8-K were filed during the quarter for
which this report on Form 10-Q is filed.
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: 5-9-96 /s/ Richard D. Nikolaev
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Richard D. Nikolaev
President and Chief Executive Officer
Date: 5-9-96 /s/ George G. Griffin
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George G. Griffin
Executive Vice President and
Chief Financial Officer
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Exhibit Index
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
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11.1 Statement regarding Computation of Earnings Per Share
12.1 Statement regarding Computation of Ratio of Earnings to
Fixed Charges and Preferred Dividends
27.1 Financial Data Schedule (for SEC use only)